Forex Basic : The Trend (1) – The Long Trends as Main Barometer

The price movements in the markets are caused by supply and demand. However, the formation of these price movements is not coincidental. All these price movements have a distinctive direction. Charles Dow, the founder of modern technical analysis and one of the names of the Dow Jones index, introduced the concept of trend by firmly deciding that there is a significant aspect of market movements. The Dow Theory, which was compiled by Charles Dow, the founder of modern technical analysis, which was published in The Wall Street Journal between 1900-1902, forms the basis of the techniques used today. At first, the aim of the theory is to estimate the trend in the stock market and to invest in a loyal market in a way that is not to paddle against the current. Now. Dow’s theory is applied as well to other derivatives including currency trading.

As stated in the Dow theory, the types of trend are divided into three which is:

  1. Main Trend (known as Long-term trend)

One-year to several-year trends. At first, these trends are not attractive for the forex market, where short-term transactions are at the forefront. However, the main trends in the markets can be considered as the barometer of the economy. In currency graphs, long-term prosperity and crisis periods of countries are directly reflected in long-term trends.

The long-term rising trend under the chart is still evident. The increasing momentum of the graph in recent months can be interpreted as the trend can continue in the coming years. The main trend supports are also very important psychological support. Despite the fact that the main trend support was tested many times in the summer months of 2007 and even under the support of the mass psychology, the trend continued.

Long-term resistance is more important than long-term support in the technical analysis of long-term downtrend trends. Because the resistance to break and strengthening means the end of the trend. The USD / CHF pair, which moved in the downtrend from the spring of 2001 to the spring of 2005, broke the long-term decline trend resistance and entered the rising trend in the short-term. Long-term decline trends are generally shorter than rising trends. The reason for this is that mass psychology causes more hysterical behaviors in the ascents. Individuals are even more enthusiastic about earning more, but because of their fears rather than willingness to lose, their trends are shorter.

The tightness of supply and demand can lead to the direction gap and hence the horizontal trend movements. EUR / CHF maintained its long-term horizontal trend between 2001 and 2003. Horizontal trends can be compared to fault lines. The rigorous supply and demand, such as the fault lines that are broken as a result of the explosion of tight energy, find its direction after a certain point causes hard movements. Therefore, the movements that occur when the support and resistance of the horizontal trend are broken, are quite stiff and are often the precursor of a new trend.

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Forex Basic : The Price Chart

GRAPHICS
The principle reason for technical analysis is to assess the graphical movements of price in the previous time and to anticipate the future change whether it is upward or downward. Consequently, charts are utilized to make the information increasingly noticeable and to make measurable investigations simpler.

CHART OVERVIEW
For graphical illustration, certain periods of price fluctuation in the currency market are utilized. These consecutively means the opening price, the highest price, the lowest price and then the closing price of a specific timeframe. Considering that the forex market open 24 hours every day, the opening price (O) is normally the value level seen at 00:00 while the closing price is viewed at 23:00 in and marked as C (Close).

GRAPHIC TYPES
Line Chart: Only closing prices were depicted in the graph. Therefore, it is preferred by many analysts due to its simplicity. However, since linear graphs do not fully reflect market movements during the day, it might be insufficient for the short-term technical analysis. Another missing point of this chart type is the line (linear) logic approach to the chaotic market mechanism.

Graphical instance above : Linear GBP / USD chart. Due to its simplicity, it is possible to see the long-term movements clearly. However, it is difficult to detect fluctuations experienced during the day.

Bar Chart: It is the most broadly utilized and known type of chart in technical analysis. The most significant explanation behind this ubiquity is that it clearly demonstrates the opening, lowest, highest and closing prices in a certain period of time. The opening price is denoted short horisontal line at the left side of the bar. The top point of the vertical bar is the highest level the price in a given periods. The bottom of the bar is the lowest value that the price has come to in a same periods. Lastly, the closing price is expressed by the horisontal notch on the right side og the bar.
The extensive length of the bar indicates high volatility while the shorter length of the bar indicates that the price oscillation was low during the selected period i.e. a tight course was observed. It is possible to say that the bar graphs are more useful in terms of the formations described later in this book, compared to other types of graphs, as they clearly show market movements.

The importance of the bar graph is better understood in terms of the volatility of the GBP / JPY and therefore in the parity where the risk is high.
Candlestick Chart: The first example of modern technical analysis is the Dow Theory.
However, traders who lived in Japan in the 17th century about three hundred years before the introduction of the Dow theory had developed their own technical methods of analysis for the prices in the brass contracts. In these analysis methods, unlike the rest of the world, they took advantage of their own developed candlestick graphs, which were used in many parameters. Candlestick charts show open, highest, lowest, and close as values, such as bar graphs. However, while bar graphs only show this data, candlestick charts try to establish a logical link between these data. This analysis method is mostly used for short term. Therefore, the popularity of this chart among traders is high.

Remarks :
UP TAIL: Represents the highest price.
ANGLE OR CLOSED (Whichever is higher).
DOWN TOWER: Represents the lowest price.
ANGLE OR CLOSED (Which is the lowest value)
FILLED BODY: If the close price is higher than the open price.
EMPTY BODY: If the close price is lower than the open price.

In candlestick charts, the difference between the opening and the closing price determines the length of the body. In combination with hollow or full, short or long body candles, certain formations are formed. The pattern / candle formation as a sign of movement will be explained in the future article.

Introduction to Technical Analysis

Technical analysis (to simpifly the writing, this term will be replaced with the word “technical”) is one way to one approach to exploit prior market movements. Technical is predictive. This is done by assessing prices, volumes, and other things through various indicators. Technical is independent of economic science, and is more related to science, such as psychology, mathematics, statistics, and physics.

As indicated by the fundamental rationale of technical, each factor that may influence the price movements of the pair is reflected in the prices. In other words, prices are a kind of barometer. In technical, past market movements are the reference. According to the logic of technical, a price movement that occurred in the past will occur again in the future. Therefore, technical is useful for understanding the dynamics of the pairs.

In the ISE, where the depth is quite low and therefore artificial movements occur frequently, technical methods are often unsuccessful in small company shares. For this reason, it is possible to create artificial movements, especially in small company stocks in the ISE and similar deep markets, which are large for small investors but with a relatively small fund for the market mechanism. The fact that these movements, which are described as charting or making wood in the stock market jargon, are almost impossible to create in the forex markets with a daily average trading volume of 2 trillion dollars, significantly increases the success rate of technical in this market.

As in other markets, the psychology factor plays a major role in the forex markets, where macroeconomic data is mostly on the agenda. When we look at the Forex markets, it can be said that the data are directing the prices by creating supply and demand. However, the main basis of the prices is the expectations and perceptions of the markets about the data rather than the data itself. For example, disclosure of positive data in a pair trend is rather, it usually results in an increased response. Negative data in pair in rising trend may cause limited decreases. Exceedingly high expectations of the data may also lead to hard-rung movements. Realizations beyond expectations can create excessive optimism or panic effects on mass psychology.

AN EXAMPLE OF THE HISTORY OF MASS PSYCHOLOGY ON THE PRICE: TULIP MADNESS
The tulip, which was taken from the Ottoman Empire to the Netherlands at the end of the XVI. This wonder of tulip which is a new flower will soon be in serious demand.
He had created. The sale of grown tulips led to the purchase of more expensive tulip bulbs. Although the tulip was only a plant in real terms, it was perceived as a status symbol, and the interest of the poor Dutch was causing new demands and therefore new rises. The prices have climbed so much that commercial agreements began to be made over tulips and people began to mortgage their homes against tulips. While this crazy process was continuing, the emergence of tulips in the unique and colored way as a result of the mutation of a virus increased the prices even more. The madness peaked in 1636 it was possible to buy a land of twelve acres with a tulip bulb or a luxury manor in Amsterdam. In some sources, even a wealthy citizen of France, the brewery in his country to a Dutch citizen, a tulip bulb sold sells against. However, the fact that the expected mutations did not occur in 1637 led to the sale of tulips and the fact that almost all investors had invested all their assets in tulip bulbs. Such that prices fell by 95 percent in just one week. Every day, dozens of investors started to commit suicide by jumping into the canals of Amsterdam as a result of this madness.

This financial balloon, which is also the subject of the famous French writer Alexandre Dumas’ Black Tulip, is still a much-discussed issue, although it has been around four hundred years. As in the case of tulip craze. As a result of the excessive demand caused by social hysteria, the fact that prices have pushed the logic boundaries clearly reveals the importance of psychology in financial markets.

Today, due to the advancement of technology and the accumulation of knowledge, the diameter of the financial balloons is much smaller. However, it should be kept in mind that the 2007 subprime crisis, which still continues its effects, is caused by the bubble in the real estate sector.

POINTS OF THE TECHNICAL ANALYSIS
While technical has been successfully implemented by many professional investors, some investors and analysts prefer fundamental analysis based on the science of economics and finance, rather than this method of analysis whose scientific is discussed. There is even widespread prejudice among investors and analysts that technical is a fortune-telling or modern alchemism. Since the technical is a relatively new method of analysis, it is still a matter of debate in academic circles. But technical refers to the sciences such as psychology, statistics, and mathematics. For example, Fibonacci analysis is a scientifically proven method and is based on mathematical science.

The increase in technical results in acceptance in some academic circles and more media coverage.

Many traders and analysts can only use technical or just fundamental analysis.

Fundamental analysis is a method that requires knowledge and experience in economics, politics, and finance. By using this method, it is possible to foresee the future movements of any pair. However, market movements often do not take place in prescribed times and conditions. Therefore, it is sometimes misleading to invest in fundamental. Technical is far from economics, policy, and finance, and the reference point is price movements. For this reason, the trends and formations, which seem to be quite strong, may only be attractive for investors considering technical. However, the realization of the data and expectations that occurred in the data, such as September 11 and so on. In the case of extraordinary developments, the error of technical is much higher than the fundameantal analysis.

Because of these and similar risk factors that exist in both methods of analysis, it is possible to make investments by synthesizing both methods of analysis and give more accurate results in short-term investments such as forex. For example, technical of a pair with predictable direction can be carried out with fundamental-analysis and more accurate results can be made. As can be seen from these examples, the timing of an investment decision taken with fundamantal analysis is generally left to the technical, which generally yields accurate results. We can only compare an investor who invests based on fundameantal analysis to a cardiologist who decides to perform a bypass operation without looking at ECG graphs. Cardiologist, for many years without examining the rhythms of the patient’s heart.

The knowledge and experience gained as a result of the academic training process can be of no use if the rhythms of the patient’s heart are not examined. Similarly, the investment decision based only on the basis of analysis can have very negative results when the market movements are taken without examination. As a result, it is a great risk to take an investment decision without examining the movements of the market.